First Year Allowances: Machinery and Plant

Part of Orders of the Day — Finance (No. 2) Bill – in the House of Commons at 9:45 pm on 12th May 1993.

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Photo of Alan Beith Alan Beith Shadow Spokesperson (Treasury) 9:45 pm, 12th May 1993

There are broadly two views about corporation tax allowances and the rate of corporation tax and the hon. Member for Keighley (Mr. Waller) has just advanced one of them. The Chancellor has embraced both of them during the past two years. One view is that we should try to keep the corporation tax rate down and, therefore, not grant a wide range of capital allowances. The other is that capital allowances for investment are more likely to bring about investment and that many business men—I know that this is true—would be willing to accept such a trade-off. They would risk a higher rate of corporation tax, or at least no further reduction, if they could get higher investment allowances.

Those who favour allowances include those who believe that those allowances should be selective or targeted. The hon. Member for Keighley advanced that view. The Labour party has advanced that view from time to time by seeking a restriction to manufacturing industry. It is one thing to target certain things which seem to be for the general good and should be the subject of allowances, such as environmental improvements; it is another to draw a broad distinction between manufacturing industry and services. That cannot reasonably be done. It does not make sense. I say that despite wishing to see British manufacturing industry revived. To impose an artificial division between manufacturing and services would not help British industry.

10.45 pm

In the aftermath of the recession the Government were forced to look for a way to stimulate the economy, and so departed from their previous strong line against more generous capital allowances. In doing so, they probably reflected the views of many business men. Certainly in the consultations that I have had recently with business men, the majority have argued for the allowance route rather than the lower corporation tax route.

If one tells business men to bear in mind the fact that Britain has lower corporation tax than Germany, they say, "Yes, but look at the use that German manufacturers are able to make of their investment allowances, the level of investment and the quality of German manufacturing plant compared with ours". That is a persuasive argument. It leads one to consider the merits of the amendment, which argues for extending the time scale.

Perhaps we can have a sort of Newbury extension to the capital allowances in the light of the fact that there is clearly greater public dissatisfaction over the recession than the Government first allowed. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) said that the Chancellor had readily taken up the concept of extending the time scale into other aspects of tax policy. He carries it also into his view of his job. He is extending the time scale of that as much as he possibly can against all those who are trying to get rid of him.

There probably would be merit in extending the time scale. The Government may have in mind the fact that a cut-off date is sometimes in itself a useful way of stimulating investment, as Lord Howe found out when he was Chancellor. But industry is looking for longer-term encouragement.

Despite my belief that we do not want to get to the point where the Government are choosing what is industry's best investment, trying to run industry and having such a complex system of investment allowances that they are pretending to know better than industry what is a sensible investment, we must listen, particularly in the face of all the signs of the decline of our manufacturing industry, to the pleas of manufacturers for investment allowances.

There was a case for the Government's decision in the Budget to go back on their previous rather hard line on the issue and there may be a case for keeping it going a bit longer.